Argentina's Much-Maligned Devaluation Is Proving a Big Hit Now

  • The nation's foreign reserves have jumped 6% since peso float
  • President Macri `came in and ripped the band-aid right off'

When Mauricio Macri, fresh off his victory in presidential elections in November, reiterated his pledge to jettison Argentina’s myriad currency controls upon assuming office, many observers said there was little chance he’d actually follow through on the promise.

After all, the move had the potential to go horribly wrong. Allowing the peso to trade freely would amount to a massive devaluation that threatened to add to an inflation surge and trigger protests from Argentines already fed up with the slumping economy and high cost of living.

Yet Macri was true to his word, dismantling the restrictions a week after taking office. And while the move has stoked a 29 percent tumble in the peso, the social unrest many feared has yet to materialize. Macri’s gambit has also helped reverse a plunge in Argentina’s foreign reserves, which had dwindled to a nine-year low as predecessor Cristina Fernandez de Kirchner tapped the funds to prop up the peso. The nation’s cash hoard has jumped 6 percent to $25.7 billion since Dec. 17, when Macri did away with the currency controls as part of his push to streamline basic economic transactions.

While Macri’s challenges are far from over -- Argentina remains mired in default, a global slowdown is throttling demand for the nation’s commodity exports and Congress is controlled by opposition parties -- the newly minted president’s early successes are helping bolster confidence in his stewardship of South America’s second-biggest economy.

“I’ve been surprised how fast he’s moved,” Ray Zucaro, chief investment officer at RVX Asset Management, said by phone from Aventura, Florida. “He came in and ripped the band-aid right off. There is still more positive news flow ahead.” 

As part of Macri’s push to restore investor trust in Argentina, Finance Secretary Luis Caputo will travel to New York next week to restart negotiations with disgruntled creditors led by billionaire Paul Singer. 

Macri, 56, has pledged to settle the decade-long legal battle with Singer’s Elliott Management and other hedge funds that has kept Argentina locked out of international debt markets since its record default in 2001.

Much of Macri’s agenda represents an unwinding of the policies implemented by Fernandez and her late husband and predecessor Nestor Kirchner. In July 2014, Fernandez refused to abide by a U.S. court order requiring Argentina to pay Elliott and other creditors before it could honor its foreign debt. The move pushed the nation into default for the second time in 13 years.

Macri’s dismantling of currency controls has only served to further bolster investor optimism that his government will reach an accord with Singer. Both men will attend the World Economic Forum in Davos, which kicks off Jan. 20.

Yields on Argentina’s $6.4 billion of dollar-denominated bonds due in 2024 fell to 7.82 percent last week, the lowest level since they were issued in the local market in May 2014.

Still, while the devaluation has been orderly thus far and reserves have risen, the government must work to damp wage and inflation expectations, said Sebastian Rondeau, a fixed-income and foreign-exchange strategist at Bank of America Corp.

Macri, who faces tough wage negotiations with public and private-sector unions in the first quarter, is revamping the nation’s statistics agency after years of alleged misreporting of economic data. The move has meant that official measures of inflation are temporarily unavailable.

Private analysts estimated annual inflation was running at 25 percent before Macri stripped away currency controls.

“The government still has things to do to ensure a successful real devaluation, including a fiscal and monetary adjustment program and limiting the pass-through to wages in coming negotiations,” Rondeau said in a report Jan. 5.

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